By Numerian

Dig deep enough into any financial crash and you will find leverage – someone, somewhere has borrowed money to invest in the asset in speculation. In the US stock market crash of 1929, the main culprit was margin. Investors were allowed by their broker to buy shares with money borrowed from the broker, and to buy more shares with the profits on their existing shares. When prices peaked and began to fall, the brokers discovered their customers no longer had enough value in their shares to cover the loan to the broker, so they issued a “margin call”. If the customer couldn’t come up with more pure cash to restore a positive collateral value for the broker’s loan (and many couldn’t), the shares were sold and the loan repaid. As customer after customer faced margin calls, shares were pressured lower and lower, and hence the cascading price decline known as a market crash.